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Ask Paul: Invest in two cheap properties or one valuable one?

man ask paul paul clitheroe property real estate investment investing deposit saved money saving money lmi lenders mortgage insurance cheap properties

Q. I am 30 years old and currently have close to $50,000 saved.

I am expecting another $50,000, hopefully before the end of the year.

Would you suggest I get a mortgage now with the first $50,000 and then get another mortgage with the second $50,000, or wait until I have the full $100,000 and get a more valuable property?

Maybe even one with the chance to develop, as I am in the construction industry. – Keith

A. Good job saving $50,000, Keith, and the additional $50,000 will certainly help.

Providing you are sure it will arrive in your bank account either this year or early next year, I don’t think it will make much difference in terms of the value of any property you might buy.

It is already September and if you bought and found a property immediately, it is unlikely you would settle before late October or November.

Where that extra $50,000 would be really handy is in creating a deposit of over 20% to avoid the dreaded lenders mortgage insurance (LMI).

I say dreaded because you pay for this to protect the lender, not you.

So provided you are certain that you will receive the extra $50,000, I would plan to buy a property on the basis that you have it already. Do discuss this with your lender, though. It would be silly to proceed in haste and find you get hit with mortgage insurance.

 

Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Ask Paul your money question.

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  1. Im a property buyers advocate on the Gold Coast and this is a question that comes up all the time from buyers – especially buyers from interstate where our property here is ‘cheap’ by comparison, where just on the $1mil mark or a touch over will buy you a 4 bed, 2 bath home on the water……. Depending upon the buyers personal circumstances and what they want to achieve long term, I would usually suggest buying two properties so that you can diversify risk, and capitalise on multiple emerging hotspots – and to ensure you always have an income coming in. Its alot easier to find a tenant at the $500pw mark, than at the $1000pw mark, with competition at the $500pw mark fierce seeing many tenants offering over and above advertised rent, and are prepared to sign long term leases 2-3 years. As a %, properties at the lower end of the market have had the same, if not better, capital growth than the higher end, on the Gold Coast.

    Buying multiple properties too means that you can onsell one with ease if your circumstances change – without having to cash out of a market totally.

    *Naturally, all of this is of a general nature and it depends on your specific circumstances and end goals

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